Pros and Cons of an Income-Sensitive Repayment Plan

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If you’ve never heard of Income-Sensitive Repayment, you’re not alone. This little-known option for student loans can offer relief if you’re struggling to keep up with your loan payments.

Income-Sensitive Repayment (ISR) applies only to loans issued under the Federal Family Education Loan (FFEL) program. While it offers some great benefits, this plan also has some limitations.

In order to see how you can lower your monthly student loan bills, and whether the Income-Sensitive Repayment plan is the right solution, let’s try to answer the following questions:

What is Income-Sensitive Repayment?

If your monthly student loan bills are overwhelming, you could reduce them through the Income-Sensitive Repayment plan made available by the Office of Federal Student Aid. It caps your monthly loan payments at 4% and 25% of your gross monthly income, depending on your lender’s unique formula.

What’s unique about the Income-Sensitive Repayment plan is that it’s customized to your income and ability to pay — as long as you pay more than or equal to the interest accruing every month. You will have to reapply for the Income-Sensitive Repayment plan annually, recertifying your gross monthly income.

That being said, you typically only have this option for five years. At the five-year mark, your lender may require you to revert to a Standard Repayment Plan or switch to a graduated repayment plan to pay off your debt in the usual decade timeframe. Other lenders and loan servicers, such as FedLoan Servicing, allow you to repay your debt in 15 years.

If you’re unable to increase your payments after you’ve exhausted Income-Sensitive Repayment eligibility, you could switch to another type of income-driven repayment (IDR) plan. Income-driven plans such as Income-Based Repayment and Income-Contingent Repayment extend your repayment to 20 or 25 years, resulting in smaller monthly payments.

Because it usually only lasts five years, the Income-Sensitive Repayment plan is typically best for borrowers who need short-term relief. With it, you’ll pay less now but shell out more in the future to pay off your debt on time.

Which loans are eligible for Income-Sensitive Repayment?

One reason Income-Sensitive Repayment gets overshadowed by other income-driven plans is its limited scope: It only applies to loans made under the FFEL program. These federal loans were disbursed by private lenders and guaranteed by the government. Some lenders who disbursed FFEL loans included Sallie Mae, Citi and Wells Fargo.

Since this loan program was discontinued in July 2010, more recent borrowers can’t qualify for Income-Sensitive Repayment. If your loans were issued in 2010 or earlier, you could be eligible.

FFEL program loans include the following:

  • Subsidized Federal Stafford Loans
  • Unsubsidized Federal Stafford Loans
  • FFEL PLUS Loans
  • FFEL Consolidation Loans

If you’re not sure whether you have FFEL loans, contact your loan servicer to find out.

What are the pros and cons of Income-Sensitive Repayment plans?

Benefits of ISRDrawbacks of ISR
● Allows FFEL borrowers to lower monthly payments without consolidating
● Doesn’t extend repayment to 20 to 25 years like other IDR plans
● Doesn’t deliver long-term relief
● Allows interest to accrue faster than on a standard repayment plan
● No forgiveness awarded on remaining balance like other IDR plans
Bottom line: FFEL borrowers who expect their income to increase in the future stand to benefitBottom line: FFEL borrowers seeking extended relief might be better off consolidating and applying for another income-driven repayment plan

The benefits

One major benefit of Income-Sensitive Repayment is that it applies specifically to FFEL loans. Most other income-driven plans exclude FFEL loans unless you consolidate them first.

Income-Sensitive Repayment may also be appealing to borrowers who want short-term relief while maintaining a 10-year deadline for paying off their loans. Other income-driven plans extend your loan terms to 20 or 25 years; while that offers you smaller monthly payments, you’ll have to deal with payments for many more years and pay more in interest over time.

Remember, you’ll have to start paying your loans off more aggressively after five years with Income-Sensitive Repayment (unless you opt for an IDR plan at that juncture). However, this plan could help borrowers who need relief now but expect their income to rise in the future.

The drawbacks

Income-Sensitive Repayment may not be so useful for borrowers who need long-term relief. If you need a longer repayment term, research income-driven plans and determine how to qualify for them. If you have FFEL loans, you’ll likely need to take on Direct Loan Consolidation before being eligible for IDR.

The Income-Sensitive Repayment plan also doesn’t offer loan forgiveness. Other income-driven plans may forgive your remaining balance after 20 or 25 years of repayment.

Another downside of Income-Sensitive Repayment is that it can cause interest to build up. If you reduce your payments, you could end up paying more interest on your FFEL loans overall.

Finally, the full details of the Income-Sensitive Repayment plan may vary somewhat from lender to lender. You’ll have to work with your loan servicer to learn the exact terms of your plan.

Which other repayment options should you consider?

As mentioned earlier, other income-driven plans are more common than Income-Sensitive Repayment. There are four income-driven plans you may qualify for:

To be eligible for most of these plans, you would need to consolidate your FFEL loans by taking out a Direct Consolidation Loan.

These plans lower your monthly student loan payment — calculate the amount using loan repayment calculators — but they also add years to your repayment. On these plans, you could be in student debt for 20 to 25 years.

Should you get on an Income-Sensitive Repayment plan?

If FFEL loan payments burden you, an Income-Sensitive Repayment plan could help. But make sure you understand that it’s a temporary solution.

Your lender or loan servicer might only allow you to lower your monthly payments for five years. If you still need relief after this time, you’ll need to consolidate your FFEL loans and switch to another income-driven plan.

Assess your situation to figure out the best repayment option for you. If you need long-term relief, you might be better off choosing a different income-driven plan.

But if you can stick to a 10-year repayment plan, consider the Income-Sensitive option. Immediate relief on your student loan payments might be just what you need to get your finances under control and back on track.

Andrew Pentis contributed to this report.

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& Graduate

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1.89% – 6.77%4Undergrad
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2.39% – 6.01%Undergrad
& Graduate

Visit Elfi

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Visit CommonBond

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1 Important Disclosures for Earnest.

Earnest Disclosures

To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.

Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of July 31, 2020, and are subject to change based on market conditions and borrower eligibility.

Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.

The information provided on this page is updated as of 7/31/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.

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2 Important Disclosures for Laurel Road.

Laurel Road Disclosures

All credit products are subject to credit approval.

Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.

As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

  1. Checking your rate with Laurel Road only requires a soft credit pull, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
  2. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
  3. After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan.
  4. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster.

Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.

Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.

Interest Rate: A simple annual rate that is applied to an unpaid balance.

Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.

KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

This information is current as of September 9, 2020. Information and rates are subject to change without notice.
 


3 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance: Fixed rates from 2.99% APR to 6.09% APR (with AutoPay). Variable rates from 2.25% APR to 6.09% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.25% APR assumes current 1 month LIBOR rate of 0.18% plus 2.32% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. 

4 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of September 10, 2020.


5 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. ‍All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.16% effective August 10, 2020.

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.